Allocate 403(b) Investments Wisely

Studies indicate that more than 90 percent of variability of returns in a portfolio is the result of asset allocation — the process of distributing your investments across various asset classes in an attempt to moderate the inevitable ups and downs of your portfolio. Asset allocation is also referred to as diversification and simply means "Don't put all of your eggs in one basket."

Not all areas of the stock market go up or down in lock step. For instance, small company stocks may soar in the same year large company stocks struggle. Bonds and fixed investments may do well for a period while stocks struggle. To offset divergent performance, experts recommend a portfolio spread among a variety of asset classes. Things to consider before allocating your investments: risk tolerance (how well do you stomach market fluctuations?) and investment time horizon (how long until you need the money?).

A popular school of thought is that the longer your investment horizon the more weighted your portfolio should be toward stocks. Conversely, the closer you are to retirement the more your portfolio should be weighted toward fixed investments. It is Wise to reallocate your portfolio annually to meet your changing goals.

The featured chart (split 60% stocks and 40% fixed investments) is an example of a portfolio that has historically returned better than 8% (before fees and trading costs). Keep in mind that past performance is no guarantee of future returns. This portfolio may not be suitable for all investors.

It can often be difficult to allocate investments on your own, especially if you are just starting out and are contributing relatively small amounts. Many mutual fund companies now offer individual investments that are pre-allocated. These funds are known by a variety of names including: lifestyle funds, life-cycle funds, life-strategy funds, and target-date funds. These funds generally come in two styles. The first style remains set in its allocation. For example a fund in this category may be split 60% stocks and 40% fixed income investments. Other funds may be split 80% stocks and 20% fixed income investments. Instead of buying a myriad of funds to achieve diversification, you simply buy one of these funds.

The second type of pre-allocated fund is based on your age and your target retirement date. Typically known as target-date funds or target-date retirement funds, these funds are named after a specified retirement date like 2030 or 2035, or 2040. Investors simply choose their estimated target date for retirement say 2020 and contribute regularly to that one fund. The beauty of this type of fund is that they are initially weighted toward stocks but gradually shift to be more weighted toward safer fixed investments as the target date approaches. Operators of the fund make all allocation adjustments. Investors simply make regular contributions to this one fund. Many no-load target-date funds charging less than 1 percent in fees are available. For beginning investors there may be truly no better way to invest. Even for veteran investors these funds have a lot of appeal.